Malaysia On Track to Cut Deficit, Raise Incomes, Official Says

Malaysia’s economy has been growing strongly, with gross domestic product expected to expand by as much as 5.5% this year, but the debt burden remains a problem. The government is aiming to shrink its budget deficit by cutting fuel and power subsidies, while robust economic growth will boost government revenue, a senior official said this week.

Idris Jala, a government minister without portfolio who also is chief executive of Pemandu, a government think tank, said Malaysia’s government will cut the fiscal deficit to 3.5% of gross domestic product this year, from 3.9% in 2013. A consumption tax of 6%, set to take effect next year, is expected to further narrow the gap to 2.8% of GDP.

The proposed goods-and-services tax will help reduce the government’s reliance on revenue from petroleum products and will bring more items under the tax net. Sustainable spending is part of the government’s 10-year Economic Transformation Program, which aims to turn Malaysia into a high-income economy by 2020. That would mean raising per capita income to $15,000 — the World Bank’s definition of high income– within the next six years, from $10,060 last year.

Mr. Idris spoke with The Wall Street Journal on the progress to date, and what lies ahead. The following is an edited excerpt of the interview:

Q: Is Malaysia on track to achieve its goal of becoming a high-income country by 2020?

A: Very much so. The numbers speak for themselves. We are hitting our gross national income and investment [targets]. Realized investment grew by five times — from 3.1% before the Economic Transformation Program [launched in 2009] to 15.3% today — and planned investment has achieved three consecutive years of historic highs.

Q: There have been concerns over rising public debt, which stood at 54.8% of GDP as of the end of 2013. Is the government planning to pare down its debt?

A: The key here is to look at debt in relation to the ability to pay. We have put a self-imposed limit at 55% of GDP, but that’s an arbitary number. We grow the economy and stay within the 55% debt ceiling but we cut our fiscal deficit. [The fiscal deficit] was 3.9% last year, compared to 6.6% before we started [fiscal reforms in 2009]. The progress we have made on fiscal reform is very encouraging.

Q: Previously you’ve set a target of reducing the fiscal deficit to 3.5% of GDP this year. Is Malaysia on course to meet that target?

A: It’s still on track. We’re working toward doing that. We have 1.7 million registered income-tax payers — (but) only 1.2 million that are effectively paying — out of 29 million [total population]. That’s not sustainable. So a consumption tax is very important for sustainability. It’s unsustainable over the longer term to rely on 40% of government revenue coming from oil and gas, and that’s why we’ve begun to diversify. In four years, we’ve brought that down to 30%.

Why do some countries have such a huge debt? It became clear to us that it was because they were focusing on all sectors [of the economy]. So the only way is to focus on the 12 sectors where we have a competitive advantage. If we were to do as usual and put government money in all sectors in equal measure, we would have gone bust on our debt ceiling like many other countries.

Q: There has been a plan to divest stakes in government-owned enterprises to reduce the state presence in the economy. Is that still ongoing?

A: Yes. We started with 33 companies in the inventory; we have done 23 of them as of the end of last year. We have a lot of government-linked companies, and you cannot suddenly abandon them overnight. You have to find a way to gradually transition. We have legacies, and it will take time for that to happen.

Q: What is Malaysia doing specifically to narrow the wealth gap?

A: We have been making sure that the salaries of the bottom 40% [of the population] rise. In the last three years there was 8.7% growth in the mean income of these people. For rural people, the only way is to get infrastructure to them: Bring electricity, water and roads to them. This is key for us. We have built 4,000 kilometers of rural roads in the last three years… and 5.1 million lives were impacted just by infrastructure.

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